Why Jakarta needs to read up on 15th-century England -Indonesia wants to build processing plants to add value to the nation’s copper, nickel and bauxite resources, but mining companies are not cooperating

Why Jakarta needs to read up on 15th-century England

Indonesia wants to build processing plants to add value to the nation’s copper, nickel and bauxite resources, but mining companies are not cooperating

Earlier this month the Indonesian government announced it would relax its ban on the export of raw mineral ores. Despite appearances to the contrary, officials claim they are not retreating from their hardline policy of resource nationalism. Restricting the export of unprocessed commodities, they continue to insist, will create high-value jobs and spur Indonesia’s economic growth. Critics of the policy are less sure.

The reasoning behind the export ban, which was proposed in 2009 and came into partial effect three years ago, is simple enough. Indonesia is rich in deposits of minerals including copper, nickel and bauxite, the ore of aluminium. But although these are extensively mined, the ores are exported unprocessed, largely to China, where they are then smelted and refined.

This, say development economists, traps Indonesia in the position of an economic colony. It simply extracts the raw resources. China captures all the high-value processing. By prohibiting the export of unrefined ores, argue proponents of the ban, Jakarta will force metals companies to build smelters in Indonesia, furthering development by pushing the domestic economy up the value curve.

It’s an argument that has resonated with successive Indonesian governments. In 2009 Jakarta passed a law that gave metals companies five years to build processing plants before a complete ban on exports of nickel, copper and other ores was to come into force in 2014.

Unfortunately not one of the planned smelters was completed on time. As a result, the ban was only partially implemented. Nickel ore and bauxite exports were largely halted, with copper ore shipments allowed to continue for another three years.

Yet progress on smelter construction has been glacial. Companies complained that mining regions lack the infrastructure and power to build processing plants. Meanwhile industry critics accused mining companies of deliberately dragging their feet and of stockpiling ores in expectation that the export ban would be reversed.

The reversal duly came on January 12, with new five-year export licences for nickel, bauxite and copper granted in return for a fresh commitment to build domestic smelters.

Whether this latest attempt to bring mineral processing industries onshore will prove any more successful than earlier efforts is questionable. Many liberal economists believe the whole idea of resource nationalism is fundamentally flawed. Countries should concentrate on economic activities in which they have a competitive edge, they argue. Indonesia’s is in extraction, not in refining. The idea that it is necessary for commodity exporters to build processing industries in order to develop their economies is nonsense.

As an example, they point to Australia, which is the world’s largest exporter of iron ore. It has only a small steel industry – smaller than Egypt’s – with its last blast furnaces constantly rumoured to be on the verge of closure as uneconomic.

Any attempt to build industries in areas where a country does not have a competitive edge will inevitably waste scarce capital and create inefficiencies which will slow, not accelerate, economic growth, insist the liberals.

It is an argument that has been going on not for years or decades, but centuries.

We may think of the United Kingdom as a developed country, but in the Middle Ages it was in much the same situation as Indonesia today. It was a basic commodity producer, with no high-value processing industries. Back then, the resource was wool. The English exported vast quantities of greasy wool. Most went to the cities of Flanders in what is now Belgium, where skilled weavers turned the raw fibres into rich broadcloth, which commanded high prices in the markets of continental Europe.

English kings had long cast covetous glances at the wealth generated by the Flanders textile industry, and in 1485 Henry VII banned the export of raw wool outright in an attempt to foster a domestic weaving industry, a policy continued by his son Henry VIII (when he wasn’t busy marrying and beheading sundry wives).

According to development economist Ha-joon Chang, this “import substitution industrialisation” policy was a resounding success. Without it, England would never have transformed itself from a raw material exporter into a producer of high-margin manufactured goods and the world’s first industrial power.

What utter rubbish, retort the economic liberals. By restricting, and then banning, raw wool exports, successive English monarchs not only caused a slump in export earnings, they precipitated a crash in domestic prices that almost killed off the business of wool production entirely, without doing anything to encourage the weaving industry. England quite simply lacked the skills base and capacity to produce high-quality broadcloth for continental Europe’s markets. The result was untold economic hardship.

What eventually led to the growth of a viable processing industry was not government policy but new technology. According to the late “anarcho-capitalist” economist Murray Rothbard, the crucial breakthrough was the development in England of worsted – a cheaper, lighter and more colourful alternative to broadcloth whose development the English government did its best to strangle at birth with restrictive regulation. If the restrictions had been fully implemented, “industrial growth might have been permanently arrested in England”, Rothbard wrote. Fortunately the state lacked the capacity to enforce its regulations, and the English economy boomed.

So far, the failure of the Indonesian government to create processing industries eight years after rolling out its own resource nationalism policy suggests that the liberal economists may have a point. But this month’s reversal of Jakarta’s export ban will not settle the debate. Expect the argument to rumble on for another few hundred years at least.

Tom Holland is a former SCMP staffer who has been writing about Asian affairs for more than 20 years